Canadian investors need to be better served by the financial industry. They deserve more than erroneous headlines, sales pitches or a proprietary investment solution.
While I have thought this for many years, what prompted me to write about this is the following headline:
“Is your portfolio positioned for
the current market turmoil?”
This was the exact wording of a direct mail marketing piece I received recently. Perhaps I am closer to the topic than most, but what forced me to pause as I held the piece in my hand, were these questions:
- Is the market actually in turmoil?
- IF the market is in turmoil, how does that affect my investment strategy?
Remember, these types of marketing headlines are just noise. They are meant to push the right hot buttons to re-enforce investor bad behavior. For most people the only thing separating them from reaching their personal financial goals is their own behavior. This is what financial services marketers are banking on.
Let’s break down the statement market turmoil.
There are three things we can look at to define market turmoil: Very weak stock market returns, extraordinarily high volatility or the stock market mechanism itself not operating properly.
Today, stock market returns have been very good with many major world stock markets recently touching all time highs.
Volatility is somewhat subjective, but one common measure is the VIX index, which is sometimes referred to as the “fear index.” In the height of the 2008 financial crises, this index was as high as 80. Today it is in the mid-teens or in line with long-term historical averages.
All major stock markets in the world are open, shares can be bought and sold and most importantly settlement on these transactions is occurring. Put another way, things are completely normal.
Based on these measurements, I would hardly say we are in a state of “market turmoil.”
Financial marketers know these facts as well, but their job is to…
- Sell financial products, not make people better investors
- Focus on noise, push hot buttons and create anxiety
- And most importantly, sell some sort of proprietary investment solution.
To this point, the marketing piece I received from a large Canadian financial institution, was offering an investment solution to the “market turmoil”. All I had to do was let the “large body of investment research and economic forecasting abilities of one of Canada’s largest and premier brokerage houses guide us through the current market turmoil.”
Pretty strong claim. Wouldn’t it be interesting to see if there is any evidence to support this? Certainly not in this marketing piece, so I did a bit of homework.
The investment solution being offered by this marketing piece was the ScotiaMcLeod Canadian Core Portfolio, which is a concentrated portfolio of 15 – 20 Canadian stocks.
If there was every a time for sound investment research and economic forecasting to add value it was over the last number of years during the 2008 financial crisis and subsequent recovery. So I searched for an “investable version” of the strategy. By investable I mean a vehicle that invested real dollars, with real expenses and real trading and implementation considerations.
What I found was the ScotiaMcLeod Canadian Core Portfolio mutual fund managed by First Trust. According to First Trust, the investment objective of the Fund “is to provide investors with a consistent long term rate of return by holding a diversified portfolio of Canadian stocks comprised of industry leaders. The Fund’s portfolio is comprised of a selection of stocks derived from those identified under research by Scotia Capital Equity Research.” Bottom line is that this particular fund is a good proxy for the investment experience investors would have achieved following this strategy.
From there, I simply compared the difference between investing $1,000,000 on October 1, 2003 (inception date of the First Trust portfolio) to April 30, 2013 versus two investable Canadian bond and stock index ETF alternatives.
So, how did the sound investment research and economic forecasting abilities fare?
Worse than I would have expected, here are the results:
Fund Name Annualized Return* Ending Value*
ScotiaMcLeod Canadian Core 3.49% $1,376,200
iShares – DEX Canadian Bond 5.68% $1,689,900
iShares – S&P/TSX Composite 7.82% $2,045,300
While I was not surprised that the ScotiaMcLeod portfolio underperformed a Canadian stock market ETF, as the evidence of active money managers underperforming stock market indices is well documented each year by S&P. The magnitude of this under performance was surprising. Following the marketing hype would have cost investors in this strategy 4.33% per year or $670,000 in dollar terms.
Even more surprising was that you could have invested in bonds, eliminated the stock market risk and ended up with 2.19% per year in return, which works out to be $313,000 more in capital.
I will admit that this anecdotal and by no means any sort of scientific study. However, it does show how listening to the marketing hype, even from big financial institutions can be hazardous to your financial health.
3 Ways to Avoid Investment Mistakes Caused by Marketing Hype Seduction
So, what do we do with this information? Here are 3 ideas:
- As best you can, ignore the advances of financial service marketers. Remember it is their job to sell financial products, not make you a successful investor.
- Spread the news. If you know of someone who has been seduced by the marketing hype, please forward this article.
- If you personally feel as if you have been seduced by the financial marketing hype and need a seasoned second opinion, please contact me.
Note: Data source Globefund. Period: October 1, 2003 to April 30, 2013. First Trust ScotiaMcLeod Canadian Core (Symbol FTC515), iShares DEX Bond (Symbol XBB), iShares S&P/TSX Composite (Symbol XIC).